Audit committee attributes and audit quality: a benchmark analysis
Abstract
This study examined audit committee attributes and audit quality with emphasis on the specific requirements of the 2011 SEC code. The study applied the deductive approach via the expost facto research design and the Binary probit regression model in analyzing the various hypotheses put forward in study. Data used for the study were gathered for 150 firm-year observations from the annual reports of quoted companies on the floor of the Nigerian Stock Exchange. Findings from the study revealed that audit committee size, frequency of meetings, number of expertise and overall effectiveness all have a positive relationship with audit quality. However, only size and overall effectiveness was significant in their relationship. The study recommends that since the significant positive nature of audit committee effectiveness show that four attributes jointly account for effectiveness, firms are encouraged to establish audit committees that have all these attributes. Furthermore, the requirement of having a 6-member audit committee is sound and empirically proven to aid audit quality. Therefore, firms yet to subscribe to these should hasten up, while sanctions should be made for firms that do not.
Keyword : audit committee attributes, audit quality, audit committee effectiveness, audit committee size, frequency of meetings
How to Cite
Asiriuwa, O., Aronmwan, E. J., Uwuigbe, U., & Uwuigbe, O. R. (2018). Audit committee attributes and audit quality: a benchmark analysis. Business: Theory and Practice, 19, 37-48. https://doi.org/10.3846/btp.2018.05
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Abbott LJ, Parker S (2000). Auditor selection and audit committee characteristics. Auditing: Journal of Practice and Theory19 (2): 47-66. https://doi.org/10.2308/aud.2000.19.2.47
Abbott LJ, Parker S, Peters, GF (2002). Audit committee characteristics and financial misstatement: a study of the efficacy of certain Blue ribbon committee recommendations www.researchgate.net
Aronmwan EJ, Ashafoke TO, Mgbame CO (2013) Audit firm reputation and audit quality. European Journal of Business and Management 5 (7): 66-75.
Barua A, Rama DV, Sharm V (2010) Audit committee characteristics and investment in internal auditing. Journal of Accounting and Public Policy 29 (2010): 503-513. https://doi.org/10.1016/j.jaccpubpol.2010.09.001
Beattie V, Fearnley S (1995) The importance of audit firm characteristics and the drivers of auditor change in UK listed companies. Accounting and Business Research25 (2): 227-239. https://doi.org/10.1080/00014788.1995.9729912
Bedard J, Chtourou SM, Courteau L (2004) The effect of audit committee expertise, independence, and activity on aggres-sive earnings management. Auditing: A Journal of Practice & Theory23 (2): 13-35. https://doi.org/10.2308/aud.2004.23.2.13
Blue Ribbon Committee (BRC) (1999) Report and Recommendation of the Blue Ribbon Committee on Improving effectiveness of Corporate Audit Committees. USA: NY, New York Stock Exchange and National Association of Securities Dealers.
Bryan, D. M., Liv, C., Tiras, S. L. (2004). The influence of independent and effective audit committees on earnings quality SSRN.com/abstract=488082
Chadegani AA (2011) Review of studies on audit quality. Inter-national Conference on Humanities, Society and Culture20 (2011): 312-315.
Companies and Allied Matters Act (CAMA) (2004) Lagos: Federal Government printer.
Dang L (2004) Assessing actual audit quality. Doctoral Thesis from Drexel University, Philadelphia, USA.
DeAngelo LE (1981) Auditor size and audit quality. Journal of Accounting and Economics 3(3): 183-199. https://doi.org/10.1016/0165-4101(81)90002-1
Demaki GO (2011) Proliferation of codes of corporate governance in Nigeria and economic development. Business and Management Review1 (6): 1-7.
Dezoort FT, Salterio SE (2001) The effects of corporate governance experience and financial reporting and audit knowledge on audit committee members’ judgments. Auditing: A Journal of Practice & Theory 20 (2): 31-47. https://doi.org/10.2308/aud.2001.20.2.31
Dhaliwal D, Naiker V, Navissi F (2006) Audit committee financial expertise, corporate governance and accruals quality: an empirical analysis www.researchgate.net
Duff A (2004) Audit quality: dimensions of audit quality. Edinburgh, The institute of Chartered Accountants of Scotland.
Emeh Y, Appah E (2013) Audit committee and timeliness of financial reports: Empirical evidence from Nigeria. Journal of Economic and Sustainable Development4 (20): 14-25.
Enofe AO, Aronmwan EJ, Abadua HS (2013a) Audit committee report in corporate financial statements: Users’ perception in Nigeria. European Journal of Accounting Auditing and Finance Research1 (1): 16-28.
Enofe AO, Mgbame C, Aderin A, Ehi-Oshio OU (2013b) Determinants of audit quality in the Nigerian business environment. Research Journal of Finance and Accounting4 (4): 36-43.
FRC (2006) Promoting audit quality: Discussion Paper. London: Financial Reporting Council.
Habbash M (2010) The effectiveness of corporate governance and external audit on constraining earnings management practices in UK: Doctoral thesis. Durham University http://etheses.dur.ac.UK/448/
IAASB (2011) Audit quality: An IAASB perspective. USA: NY, International Auditing and Assurance Standards, Board.
Ilaboya OJ (2005) Advanced Financial Accounting. Benin City, Mindex Publishers.
Ilaboya OJ, Ohiokha FI (2014) Audit firm characteristics and audit quality in Nigeria. International Journal of Business and Economics Research3 (5): 187-195. https://doi.org/10.11648/j.ijber.20140305.14
Jensen M (1993) Modern industrial revolution, exit and failure of internal control system. Journal of finance48(3): 831-880. https://doi.org/10.1111/j.1540-6261.1993.tb04022.x
Jensen, M. C., Meckling, W. H. (1976). Theory of the firm: Mana-gerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4): 305-360.
Jiang L, Jeny-Cazavan A., Audousset-Coulier S (n.d.). Who are industry specialist? 1-32.
Juhmani OI (2017) The impact of audit committee characteristics on earnings management in the pre- and post- Bahraini corporate governance code 2011. Asian Journal of Economics, Business and Accounting4 (3): 1-12. https://doi.org/10.9734/AJEBA/2017/36234
Kallapur S, Sankaraguruswamy S, Zang Y (2008) Audit market competition and audit quality, 1-30.
Kibiyaa MU, Ahmada AC, Amran NA (2016) Audit committee characteristics and financial reporting quality: Nigerian non-financial listed firms. The European Proceeding of Social & Behavioural Sciences, 753-760. https://doi.org/10.15405/epsbs.2016.08.106
Krishnan J (2005) Audit committee quality and internal control: an empirical analysis. The Accounting Review80 (2): 649-675. https://doi.org/10.2308/accr.2005.80.2.649
Lawrence A, Minutti-Meza M, Zhang P (2011) Can big 4 versus non-big 4 differences in audit-quality proxies be attributed to client characteristics? The Accounting Review86 (1): 259-286. https://doi.org/10.2308/accr.00000009
Li J, Mangena M, Pike R (2012) The effect of audit commit-tee characteristics on intellectual capital disclosure. The British Accounting Review44 (2012): 98-110. https://doi.org/10.1016/j.bar.2012.03.003
Lin JW, Li JF, Yang SY (2006) The effect of audit committee per-formance on earnings quality. Managerial Auditing Journal 21 (9): 921-933. https://doi.org/10.1108/02686900610705019
Livingston, P. (2003). Financial experts on audit committees. Financial Executive 19: 6–7.
Madawaki A, Amran NA (2013) Audit committees: how they affect financial reporting in Nigerian Companies. Journal of Modern Accounting and Auditing 9 (8): 1070-1080.
Mgbame CO, Eragbhe E, Osazuwa NP (2012) Audit partner tenure and audit quality: an empirical analysis. European Journal of Business and Management 4 (7): 154-162.
Nnadi GA (1999) Making audit committees effective. ICAN News, October/November, 6-9.
Odia JO, Ogiedu KO (2013) Corporate governance and earnings management in the Nigerian banking industry. ESUT Journal of Accountancy 4 (1): 238-243.
Okolie JU (2014) Corporate governance and audit committee in Nigeria. Journal of Policy and Development Studies9 (1): 226-233. https://doi.org/10.12816/0011193
Omoye AS, Aronmwan EJ (2013) Audit firm rotation and audit quality in the Nigerian banking sector. Benin Journal of Social Sciences 21 (2): 34-43.
Owolabi SA, Dada SO (2011) Audit committee: an instrument of effective corporate governance. European Journal of Economics Finance and Administrative sciences 35: 173-184.
Pucheta-Martinez MC, Cristina de Fuentes (2007) The impact of audit committee characteristics on the enhancement of the quality of financial reporting: an empirical study in the Spanish context. Journal Compilation15 (6): 1394-1412. https://doi.org/10.1111/j.1467-8683.2007.00653.x
Salawu OM, Okpanachi JO, Yahaya OA, Dikki CA (2017) Effects of audit committee expertise and meeting on audit quality of listed consumer-goods companies in Nigeria. European Journal of Accounting, Auditing and Finance Research 5 (10): 61-79.
SEC (2011) Code of Corporate Governance for Public Companies in Nigeria. Abuja. SEC.
Simunic D (1980)The pricing of audit services: theory and evidence. Journal of Accounting Research (Spring),161-190. https://doi.org/10.2307/2490397
Stewart J, Munro L (2007) The impact of audit committee existence and audit committee meeting frequency on the exter-nal audit: perceptions of Australian auditors. International Journal of Auditing11: 51-69. https://doi.org/10.1111/j.1099-1123.2007.00356.x
Sutton S, Lampe J (1990) Formulating a process measurement system for audit quality. Proceedings of University of Southern California Audit Judgment Symposium.
Treadway Commission (1987) The report of the national commission on fraudulent financial reporting, National Commission on Fraudulent Financial Reporting, Washington D.C.
Uwuigbe OR (2011) Corporate governance and financial performance of banks in Nigeria: Master’s thesis. Covenant university, Ota, Nigeria.
Olubukunola RU, Uwuigbe U, Iyoha F, Omankhanlen AE (2016) Globalizing the Board and Financial Performance: evidence from Nigerian Banks. Indian Journal of Finance10 (9): 66-79. https://doi.org/10.17010/ijf/2016/v10i9/101481
Uwuigbe U, Agba LU, Jimoh J, Olubukunola RU, Rehimetu J (2017) IFRS adoption and earnings predictability: evidence from listed banks in Nigeria. Banks and Bank Systems 12 (1): 166-174. https://doi.org/10.21511/bbs.12(1-1).2017.10
Uwuigbe U, Francis KE, Uwuigbe OR, Ataiwrehe CM (2016a) International financial reporting standards adoption and accounting quality: evidence from the Nigerian banking sector. Corporate Ownership & Control 14 (1): 287-294. https://doi.org/10.22495/cocv14i1c1p12
UwuigbeU, Uwuigbe OR, Ebeguki EI, Jinadu O, Otekunrin A (2016b) The effect of financial performance and board size on corporate executive compensation: a study of selected listed banks in Nigeria. Journal of Internet Banking and Commerce21 (3).
Xie B, Davidson WN, DaDalt PJ (2003) Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate Finance 9 (3): 295-316. https://doi.org/10.1016/S0929-1199(02)00006-8
Yermack D (1996) Higher market valuation of companies with small board of directors. Journal of Financial Economics 40 (2): 185-211. https://doi.org/10.1016/0304-405X(95)00844-5
Yuniarti R (2011) Audit firm size, audit fee and audit quality. Journal of Global Management 2 (1): 84-97.
Zaman M, Hudaib M, Haniffa R (2011) Corporate governance quality, audit fees and non-audit services fees. Journal of Business Finance and Accounting 38 (1/2): 165-197. https://doi.org/10.1111/j.1468-5957.2010.02224.x
Zureigat QM (2011) The effect of ownership structure on audit quality: evidence from Jordan. International Journal of Business and Social Science 2 (10): 38-46.
Abbott LJ, Parker S, Peters, GF (2002). Audit committee characteristics and financial misstatement: a study of the efficacy of certain Blue ribbon committee recommendations www.researchgate.net
Aronmwan EJ, Ashafoke TO, Mgbame CO (2013) Audit firm reputation and audit quality. European Journal of Business and Management 5 (7): 66-75.
Barua A, Rama DV, Sharm V (2010) Audit committee characteristics and investment in internal auditing. Journal of Accounting and Public Policy 29 (2010): 503-513. https://doi.org/10.1016/j.jaccpubpol.2010.09.001
Beattie V, Fearnley S (1995) The importance of audit firm characteristics and the drivers of auditor change in UK listed companies. Accounting and Business Research25 (2): 227-239. https://doi.org/10.1080/00014788.1995.9729912
Bedard J, Chtourou SM, Courteau L (2004) The effect of audit committee expertise, independence, and activity on aggres-sive earnings management. Auditing: A Journal of Practice & Theory23 (2): 13-35. https://doi.org/10.2308/aud.2004.23.2.13
Blue Ribbon Committee (BRC) (1999) Report and Recommendation of the Blue Ribbon Committee on Improving effectiveness of Corporate Audit Committees. USA: NY, New York Stock Exchange and National Association of Securities Dealers.
Bryan, D. M., Liv, C., Tiras, S. L. (2004). The influence of independent and effective audit committees on earnings quality SSRN.com/abstract=488082
Chadegani AA (2011) Review of studies on audit quality. Inter-national Conference on Humanities, Society and Culture20 (2011): 312-315.
Companies and Allied Matters Act (CAMA) (2004) Lagos: Federal Government printer.
Dang L (2004) Assessing actual audit quality. Doctoral Thesis from Drexel University, Philadelphia, USA.
DeAngelo LE (1981) Auditor size and audit quality. Journal of Accounting and Economics 3(3): 183-199. https://doi.org/10.1016/0165-4101(81)90002-1
Demaki GO (2011) Proliferation of codes of corporate governance in Nigeria and economic development. Business and Management Review1 (6): 1-7.
Dezoort FT, Salterio SE (2001) The effects of corporate governance experience and financial reporting and audit knowledge on audit committee members’ judgments. Auditing: A Journal of Practice & Theory 20 (2): 31-47. https://doi.org/10.2308/aud.2001.20.2.31
Dhaliwal D, Naiker V, Navissi F (2006) Audit committee financial expertise, corporate governance and accruals quality: an empirical analysis www.researchgate.net
Duff A (2004) Audit quality: dimensions of audit quality. Edinburgh, The institute of Chartered Accountants of Scotland.
Emeh Y, Appah E (2013) Audit committee and timeliness of financial reports: Empirical evidence from Nigeria. Journal of Economic and Sustainable Development4 (20): 14-25.
Enofe AO, Aronmwan EJ, Abadua HS (2013a) Audit committee report in corporate financial statements: Users’ perception in Nigeria. European Journal of Accounting Auditing and Finance Research1 (1): 16-28.
Enofe AO, Mgbame C, Aderin A, Ehi-Oshio OU (2013b) Determinants of audit quality in the Nigerian business environment. Research Journal of Finance and Accounting4 (4): 36-43.
FRC (2006) Promoting audit quality: Discussion Paper. London: Financial Reporting Council.
Habbash M (2010) The effectiveness of corporate governance and external audit on constraining earnings management practices in UK: Doctoral thesis. Durham University http://etheses.dur.ac.UK/448/
IAASB (2011) Audit quality: An IAASB perspective. USA: NY, International Auditing and Assurance Standards, Board.
Ilaboya OJ (2005) Advanced Financial Accounting. Benin City, Mindex Publishers.
Ilaboya OJ, Ohiokha FI (2014) Audit firm characteristics and audit quality in Nigeria. International Journal of Business and Economics Research3 (5): 187-195. https://doi.org/10.11648/j.ijber.20140305.14
Jensen M (1993) Modern industrial revolution, exit and failure of internal control system. Journal of finance48(3): 831-880. https://doi.org/10.1111/j.1540-6261.1993.tb04022.x
Jensen, M. C., Meckling, W. H. (1976). Theory of the firm: Mana-gerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4): 305-360.
Jiang L, Jeny-Cazavan A., Audousset-Coulier S (n.d.). Who are industry specialist? 1-32.
Juhmani OI (2017) The impact of audit committee characteristics on earnings management in the pre- and post- Bahraini corporate governance code 2011. Asian Journal of Economics, Business and Accounting4 (3): 1-12. https://doi.org/10.9734/AJEBA/2017/36234
Kallapur S, Sankaraguruswamy S, Zang Y (2008) Audit market competition and audit quality, 1-30.
Kibiyaa MU, Ahmada AC, Amran NA (2016) Audit committee characteristics and financial reporting quality: Nigerian non-financial listed firms. The European Proceeding of Social & Behavioural Sciences, 753-760. https://doi.org/10.15405/epsbs.2016.08.106
Krishnan J (2005) Audit committee quality and internal control: an empirical analysis. The Accounting Review80 (2): 649-675. https://doi.org/10.2308/accr.2005.80.2.649
Lawrence A, Minutti-Meza M, Zhang P (2011) Can big 4 versus non-big 4 differences in audit-quality proxies be attributed to client characteristics? The Accounting Review86 (1): 259-286. https://doi.org/10.2308/accr.00000009
Li J, Mangena M, Pike R (2012) The effect of audit commit-tee characteristics on intellectual capital disclosure. The British Accounting Review44 (2012): 98-110. https://doi.org/10.1016/j.bar.2012.03.003
Lin JW, Li JF, Yang SY (2006) The effect of audit committee per-formance on earnings quality. Managerial Auditing Journal 21 (9): 921-933. https://doi.org/10.1108/02686900610705019
Livingston, P. (2003). Financial experts on audit committees. Financial Executive 19: 6–7.
Madawaki A, Amran NA (2013) Audit committees: how they affect financial reporting in Nigerian Companies. Journal of Modern Accounting and Auditing 9 (8): 1070-1080.
Mgbame CO, Eragbhe E, Osazuwa NP (2012) Audit partner tenure and audit quality: an empirical analysis. European Journal of Business and Management 4 (7): 154-162.
Nnadi GA (1999) Making audit committees effective. ICAN News, October/November, 6-9.
Odia JO, Ogiedu KO (2013) Corporate governance and earnings management in the Nigerian banking industry. ESUT Journal of Accountancy 4 (1): 238-243.
Okolie JU (2014) Corporate governance and audit committee in Nigeria. Journal of Policy and Development Studies9 (1): 226-233. https://doi.org/10.12816/0011193
Omoye AS, Aronmwan EJ (2013) Audit firm rotation and audit quality in the Nigerian banking sector. Benin Journal of Social Sciences 21 (2): 34-43.
Owolabi SA, Dada SO (2011) Audit committee: an instrument of effective corporate governance. European Journal of Economics Finance and Administrative sciences 35: 173-184.
Pucheta-Martinez MC, Cristina de Fuentes (2007) The impact of audit committee characteristics on the enhancement of the quality of financial reporting: an empirical study in the Spanish context. Journal Compilation15 (6): 1394-1412. https://doi.org/10.1111/j.1467-8683.2007.00653.x
Salawu OM, Okpanachi JO, Yahaya OA, Dikki CA (2017) Effects of audit committee expertise and meeting on audit quality of listed consumer-goods companies in Nigeria. European Journal of Accounting, Auditing and Finance Research 5 (10): 61-79.
SEC (2011) Code of Corporate Governance for Public Companies in Nigeria. Abuja. SEC.
Simunic D (1980)The pricing of audit services: theory and evidence. Journal of Accounting Research (Spring),161-190. https://doi.org/10.2307/2490397
Stewart J, Munro L (2007) The impact of audit committee existence and audit committee meeting frequency on the exter-nal audit: perceptions of Australian auditors. International Journal of Auditing11: 51-69. https://doi.org/10.1111/j.1099-1123.2007.00356.x
Sutton S, Lampe J (1990) Formulating a process measurement system for audit quality. Proceedings of University of Southern California Audit Judgment Symposium.
Treadway Commission (1987) The report of the national commission on fraudulent financial reporting, National Commission on Fraudulent Financial Reporting, Washington D.C.
Uwuigbe OR (2011) Corporate governance and financial performance of banks in Nigeria: Master’s thesis. Covenant university, Ota, Nigeria.
Olubukunola RU, Uwuigbe U, Iyoha F, Omankhanlen AE (2016) Globalizing the Board and Financial Performance: evidence from Nigerian Banks. Indian Journal of Finance10 (9): 66-79. https://doi.org/10.17010/ijf/2016/v10i9/101481
Uwuigbe U, Agba LU, Jimoh J, Olubukunola RU, Rehimetu J (2017) IFRS adoption and earnings predictability: evidence from listed banks in Nigeria. Banks and Bank Systems 12 (1): 166-174. https://doi.org/10.21511/bbs.12(1-1).2017.10
Uwuigbe U, Francis KE, Uwuigbe OR, Ataiwrehe CM (2016a) International financial reporting standards adoption and accounting quality: evidence from the Nigerian banking sector. Corporate Ownership & Control 14 (1): 287-294. https://doi.org/10.22495/cocv14i1c1p12
UwuigbeU, Uwuigbe OR, Ebeguki EI, Jinadu O, Otekunrin A (2016b) The effect of financial performance and board size on corporate executive compensation: a study of selected listed banks in Nigeria. Journal of Internet Banking and Commerce21 (3).
Xie B, Davidson WN, DaDalt PJ (2003) Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate Finance 9 (3): 295-316. https://doi.org/10.1016/S0929-1199(02)00006-8
Yermack D (1996) Higher market valuation of companies with small board of directors. Journal of Financial Economics 40 (2): 185-211. https://doi.org/10.1016/0304-405X(95)00844-5
Yuniarti R (2011) Audit firm size, audit fee and audit quality. Journal of Global Management 2 (1): 84-97.
Zaman M, Hudaib M, Haniffa R (2011) Corporate governance quality, audit fees and non-audit services fees. Journal of Business Finance and Accounting 38 (1/2): 165-197. https://doi.org/10.1111/j.1468-5957.2010.02224.x
Zureigat QM (2011) The effect of ownership structure on audit quality: evidence from Jordan. International Journal of Business and Social Science 2 (10): 38-46.